• This Week's Trade Ideas:
Bullish: Coca Cola Company> KO – Buy the April 21st 42 Calls for $0.85 or less with a close or anticipated close above $42.70 in an up market with expectations for continued strength in the indices. AND / OR… IShares Silver ETF> SLV – Buy the April 21st 17 Calls for $0.65 or less with a close or anticipated close above $17.55. (SPECULATIVE!)
Bearish: None at this time but several under consideration.

• Market Overview:
Q1 earnings do not kick in for a few more weeks and won’t really start to hit in large waves until the third week of April.  Naturally there are some notable economic reports due out this week and in the weeks that follow but this could be a period in where the markets are forced to try to stand on their own to hold the gains we’ve seen since the election.  With Q1 GDP shaping up rather poorly, and the Trump agenda in turmoil, this could be a time where sellers become a little more emboldened.

• Below the Radar:
We stayed away from the “auto land” slow-motion fiasco last week but this week there is no avoiding it as it is “front and center”.  This is not a sector that the markets are likely to receive support from for the foreseeable future…

• Options Academy:
This week we want to highlight a few related items concerning hedging and execution.  We’re consistently asked about fees and commissions and how they can add up.  It is true that frequent trading will naturally raise trading expenses but, on the other hand, commissions have really never been lower than they are now.  Modern electronic brokerage has dramatically reduced the cost of trading along with having provided superior and timely execution.  The only negative that we’ve seen recently, in terms of cost, has been the widening of the bid-ask spreads by market-makers but that’s beyond the control of brokerage houses.  Overall, trading platforms are better than ever and commissions are very competitive.  Having said that, there’s no reason to ever spend more than we need to!

Bounced, found resistance, now it really gets interesting…

The Trade(s):

We strongly suggest attending tomorrow morning's Advantage Point Morning Call for full details with respect to these idea(s), last week’s and options education.

Bullish:

Coca Cola Company> KO – Buy the April 21^st 42 Calls for $0.85 or less with a close or anticipated close above $42.70 in an up market with expectations for continued strength in the indices.

AND / OR…

IShares Silver ETF> SLV – Buy the April 21^st 17 Calls for $0.65 or less with a close or anticipated close above $17.55.  (SPECULATIVE!)

Bearish:

None at this time but several under consideration.

Outlook:

Our Market Overview section is worth the read to get a sense of how things are shaping up in the markets-at-large.  With respect to these ideas, the FED minutes and other reports could shake things up so remain on guard especially if you elect to utilize these trade ideas.

Technicals:

Will be discussed in-depth in the Advantage Point Morning Call webinar.

While these trade ideas are focused on individual stocks (ETFs), one main factor remains the major indices.  Are we STILL in a channel of a lesser degree (yellow) that will remain corrective?  Or are we on the verge of breaking out of “LD” and challenging the highs made several weeks back in “LC”?  Will the FED minutes be the catalyst needed to ignite more volatile movement?

Fundamentals:

These trade ideas are technically-driven.

(Editor's note: This trade idea may be updated periodically, in keeping with market conditions. It is intended solely for educational purposes.)

Recap of Last Week:

Last week we had WMT trigger and KO nearly trigger but ultimately fizzled out without doing so.  WMT moved nicely to our resistance zone in the face of weakening markets towards the end of the week.  Ultimately it couldn’t push through those levels and as we suspected as much, we put an update email out on Friday.  KO got right to our trigger level in a surprising late day push but could never get above that level in a positive market.

We never contemplated bearish trade ideas as the markets spent most of the week gliding higher on window-dressing momentum related to the end of March and end of Q1.

(Editor's note: This trade idea may be updated periodically, in keeping
with market conditions. It is intended solely for educational purposes.)

Once again, here’s how we saw things last week:

“As of this writing, the DOW is resting just above the 50 SMA, which it found support at last week, BUT…it’s still below the red support line of the channel it had been trading in since just after the election.  It will be interesting and telling to see if it can works it’s way back into the channel or if it fails.  Failure would likely mean a further plunge down to near the 20,000 mark or possibly a little beyond.  We noted this last week as well but we’ve highlighted that potential band of support in green this week. 

We’d expect the markets to try to alleviate some of the oversoldness in the near-term and then what happens from there is critical.  Back in the channel or breaking below the 50 SMA?  Only time will tell…”

Let’s now move to the present:

As can be seen in the chart above, the DIA (DOW ETF) behaved in a manner fairly-close to our expectations.  The 50 sma did indeed hold as there was some short-term oversoldness in the markets.  The DIA worked its way back to the red “R” denoted resistance line of the channel of a lesser degree.  With this Monday’s action combined with the ascension of the 50 sma, the DIA is back in a precarious spot right near the 50.  Should it not hold it’s likely to test last week’s support labeled with the green line.  It that level gives way, the DIA could then try the band of support highlighted in green near 20,000 in DOW pricing.

Q1 earnings do not kick in for a few more weeks and won’t really start to hit in large waves until the third week of April.  Naturally there are some notable economic reports due out this week and in the weeks that follow but this could be a period in where the markets are forced to try to stand on their own to hold the gains we’ve seen since the election.  With Q1 GDP shaping up rather poorly, and the Trump agenda in turmoil, this could be a time where sellers become a little more emboldened.

This Week’s Economic Calendar

ADP employment on Wednesday and the “jobs numbers” on Friday are the high-profile releases of the week, other than the FED minutes on Wednesday, but assorted releases could certainly move markets that seem to have at least started to awaken from their extended low volatility slumber.

We stayed away from the “auto land” slow-motion fiasco last week but this week there is no avoiding it as it is “front and center”.  This is not a sector that the markets are likely to receive support from for the foreseeable future.  We came across a good deal of recent coverage in our travels.  We’ll start things off with a recently published Bloomberg graphic showing March Auto Sales:

That’s not a good start but it gets worse from here.  Things are seemingly more dire than just one poor sales month according to this piece that appeared on Zerohedge last week:

“For months we've been talking about the massive lending bubble propping up the U.S. auto market.  Now, noting many of the same concerns that we've highlighted repeatedly, Morgan Stanley's auto team, led by Adam Jonas, has just issued a report detailing why they think used car prices could crash by up to 50% over the next 4-5 years.”

http://www.zerohedge.com/news/2017-03-31/heres-why-used-car-prices-may-crash-50

It’s a very detailed piece that’s worth checking out but before we leave it behind we have to include this graphic of projections.

It’s also worth remembering that financing schemes somewhat similar to what occurred during the housing bubble made what may become known as the “auto bubble” possible.

Several TV commentators have tried to play down the auto glut and what it may portend.  However, vehicle and auto parts sales account for roughly 20% of the retail sales mix so they’re not exactly inconsequential.

Speaking of financing schemes…that will lead us back into housing territory this week.  They’re happening, AGAIN…

http://www.cnbc.com/2017/04/03/homeowners-are-pulling-cash-out-again-this-time-its-the-millennials.html

The FED has succeeded in reflating the housing market so naturally more and more Americans are tapping the new “housing ATM” to renovate and consolidate debt.  After all, what could go wrong?

As we’ve noted here recently, housing prices in many large markets have become more expensive than ever.  Many are now priced out of acquiring a new home as a result but this is only the beginning of the negative effects that stem from the FED’s reflation aka “wealth effect” policies.  For many Americans that so-called recovery has yet to transpire and they’re still finding things harder than they have at any time during their lives.  A recent piece by Wolf Richter explores the “other side” of the recovery via FED policies.  http://wolfstreet.com/2017/04/02/economy-ruined-for-many-americans/

Here are few truly concerning lowlights:

“In the dazzling glitter and excitement of soaring asset prices that central banks around the world, and particularly the Fed, have tried so hard to engineer, it’s easy to forget that not everyone has those assets, that a lot of people can’t get “rich” just sitting on inflated assets, that they have to work long hours in measly jobs just to stay one paycheck ahead of hunger and homelessness.”

“Turns out, among Americans making $30,000 or less a year, 67% worry “a great deal” about hunger and homelessness! Food and shelter, two of the most basic human needs. That’s the highest percentage ever in Gallup’s data series on this question going back to 2001.”

“Median annual household income in February was $58,714, according to Sentier Research. On an inflation-adjusted basis, this was about flat with February 2016 and below February 2000.” 

If we pause to take account of things thus far, the auto-related sectors are not likely to help the growth cause any time soon.  We can combine dubiously-financed area of the economy with too much indebtedness (we’ve covered that here recently) of virtually all kinds that are hampering home purchases maybe as much as listed prices.  Recall that we recently covered the fact that in many markets home prices have been reflated so much as to be unaffordable.  We also cannot forget about flatlined income stretching back to 2000 and let’s also not forget that the consensus has interest rates headed higher in the near future.  This smattering doesn’t seem or feel all that encouraging but we have yet to cover commercial real estate!  “CE” has been another one of the key topics we’ve visited week-in-week-out.  Here are few key graphics we tracked down on the Web:

If you’ve been wondering just how real the retail crunch already is, take a look at BOA’s graphic of department store sales.  YES, that’s correct, they are already below 2008 levels.  Remember that this is the performance of the “anchors”.  This wouldn’t seem to bode well for mall owners who are already feeling it due to “lessers” shuttering:

2016 was the highest year since 2008 in terms of the closing of retail square footage.  Commercial real estate is an area that we believe prudent investors should keep an eye on.  It has the potential to create “domino effects” like few others.

These interesting times continue to shout: STAY NIMBLE!

This week we want to highlight a few related items concerning hedging and execution.  We’re consistently asked about fees and commissions and how they can add up.  It is true that frequent trading will naturally raise trading expenses but, on the other hand, commissions have really never been lower than they are now.  Modern electronic brokerage has dramatically reduced the cost of trading along with having provided superior and timely execution.  The only negative that we’ve seen recently, in terms of cost, has been the widening of the bid-ask spreads by market-makers but that’s beyond the control of brokerage houses.  Overall, trading platforms are better than ever and commissions are very competitive.  Having said that, there’s no reason to ever spend more than we need to!

Many folks that are new to trading and platforms feel so overwhelmed that simple “tricks” escape them.  Let’s use a few examples to help our cause:

 Above is a simple graphic of the Options House platform that depicts a preview of a 10 lot call purchase in KO (Coke).  The focus here is not on the pros and cons of selecting the 42 calls in April but rather the fact that we’d be charged $10.38 in commissions and fees to do so.  Let’s assume that we purchase these calls and a few days later we decide to close them out for a profit.  Let’s also assume that we’d like to keep riding KO’s stock price higher too.  To do that, we’ll have to own some calls, so let’s assume that we want to go out a little further in time (farther out expiration) and that we want to buy a slightly different strike.  If we execute the closing trade by itself, we’ll be charged the same $10.38.  If we opened a new 10 lot we’d be charged another $10.38 for a total of $20.76.  However, if we structure the execution as a “package deal”, we can save a few bucks.  Behold!:

Once again, the focus is on cost not strategy. To close our original calls out and get into our new and improved calls we’d only pay $15.82.  That’s about $5 which may leave many wondering what the big deal is!  Think about all the trades over the course of a year or 10 years.  Think about trading more contracts and how much more the savings would be as a result.  Then think about compounding!  Always think about compounding!  (Well maybe not “always’ but a lot!)  Saving a little here is similar to getting a better fill price to enter the trade: It all adds up!

We can’t guarantee prices as these are just examples but the principle should hold regardless of your commissions structure.

We'll plan to cover this angle and field hedging-related/execution questions, should they arise and time-permitting, in this week's Advantage Point Morning Call Webinar.

Have a great week!

The Advantage Point Team